Frankfurt and Munich are among the riskiest places in the world for real estate buyers

According to a study, Frankfurt and Munich have the highest risk of a real estate bubble in the world. According to the major Swiss bank UBS, the financial center on the Main is in second place after Toronto. In Munich, too, the housing market is severely overheated. The city ranks fourth among all 25 metropolises surveyed, just behind Zurich. "Especially investors who are considering purchases in these regions of Germany for reasons of return should exercise caution at the moment," advised Maximilian Kunkel, UBS's chief investment strategist in Germany.

In its "Global Real Estate Bubble Index" published on Wednesday, the bank calculated a value of 2.21 for Frankfurt and 1.80 for Munich - with more than 1.5 points there is a risk of a bubble. Accordingly, Toronto, Amsterdam, Tokyo, Vancouver and Hong Kong are also considered to be heavily overvalued above 1.5 points. UBS sees London, Paris, Los Angeles and Sydney as slightly less overheated.

Due to low interest rates, home prices have steadily decoupled from local incomes and rents over the past decade, according to UBS. "The cities most at risk of a bubble have seen inflation-adjusted price increases averaging 60 percent over this period, while real incomes and rents have risen by only about 12 percent."

In previous years, UBS had already noticed that the housing markets in Munich and Frankfurt were overheating. However, if you look at how much of their income qualified employees have to spend on a 60 square meter apartment close to the city centre, Frankfurt and Munich are far behind Tokyo, Hong Kong, London and Paris.

In Frankfurt, UBS is now observing a cooling of the market. In the Main metropolis, the most recent double-digit price increases have decreased for the first time in ten years, it said. "Between mid-2021 and mid-2022, real estate prices rose by only around 5 percentage points." Apartment prices in Frankfurt are still more than 60 percent above the level of five years ago.

Munich has the highest price-to-rent ratio. It is therefore particularly expensive to buy a property here in relation to renting. After prices had more than doubled in the past decade, growth here also weakened to around five percent. "The boom is coming to an end," said Kunkel, looking at both cities.

In general, UBS sees the real estate markets before a turning point. While interest rates have risen rapidly and the economic outlook has clouded over, high inflation is reducing household purchasing power. This means that the still robust labor market in many cities is the last pillar of the home market. Unlike many experts, who only expect the real estate boom to slow down, UBS warns of severe consequences: In many of the very highly rated cities, "significant price corrections are to be expected" in the next few quarters.